Tax Incidence is the analysis of where the burden of tax "falls," either buyers or sellers, based on different economic situations. Usually, the main factors of incidence are the tax rate and the elasticity of the supply (it does not depend on where tax is collected).
Panel A) If there is a new or increased excise tax and supply is elastic, then firms can simply produce more of the good. This will decrease their loss, putting the burden of the tax mostly on the buyers.
Panel B) If there is an increased excise tax and supply is inelastic, then firms make less money with each product. Thus, they bear most of the burden of the excise tax.
Panel C) If there is an increased excise tax and demand is elastic, then consumers will buy less of the product because it will probably cost more. This makes the producers lose money, bearing most of the burden of the excise tax.
Panel D) If there is an increased excise tax and demand is inelastic, then buyers bear most of the burden because they still buy the same amount of products but at a higher price.
In February of 2009, the federal government passed a law increasing the excise tax on cigarettes, and in March, the increased tax went into effect. The tax was increased by $0.62 per pack up to $1.01 for every pack. As expected, this led companies to increase the price of cigarettes as well in order to minimize losses. Philip Morris USA, a major cigarette maker, increased the prices by $0.71, which is actually nine cents more than the tax increase. Another maker, R.J. Reynolds Tobacco, increased wholesale prices by $0.44.
In this scenario, the demand for cigarettes is relatively inelastic. It is an addictive drug, so people that smoke will probably continue to buy cigarettes, regardless of the price. For this reason, even as prices increase, the demand stays similar to before. Because of that, the tax incidence, the burden of the increased excise tax on cigarettes, falls mostly on the buyers of cigarettes. If cigarettes were not addictive and demand was elastic, people would buy less. That would put the tax incidence on the sellers. However, as of now, the tax incidence of any increased excise tax on cigarettes will fall on the buyers.
This article titled, “Property tax recovery needs to be addressed,” the writer explores the connections between real estate and reality stocks. This article notes that current laws treat these two differently when it comes two tax rates even though people invest in both areas in similar regards. The writer does note that real estate has more value per unit as opposed to stocks. Furthermore, stocks are more volatile and the prices tends to fluctuate more often due to the higher rate of exchange. Thus writer states that if the taxes on properties are lowered, it may serve as a dampener for collection of tax revenue for the government. Furthermore, in terms of sale of stocks, tax was exempted by the government in order to encourage capital market transactions. In order to offset the revenue loss, the government employed tax benefits on equity sale. Unfortunately, this type of system is not available to property transactions which another difference in the two markets. In all, the writer states that these different may cause burden/deadweight loss if the tax rates on two different areas are equalized which prevents government from putting these two taxes under the same law.
DEADWEIGHT LOSS
Deadweight loss (also, excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. In other words, either people who would have more marginal benefit than marginal cost are not buying the product, or people who have more marginal cost than marginal benefit are buying the product.
Causes of deadweight loss can include monopoly pricing (in the case of artificial scarcity), taxes or subsidies, and binding price ceilings or floors. The term deadweight loss may also be referred to as the "excess burden" of monopoly or taxation.
On a graph, Deadweight Loss is the area between the new market quantity, after one of the causes have occurred, and the previous Pareto optimum.
In the case of a Price Ceiling, the consumer surplus is lost through the inability of the consumer to purchase more products before their MB=MC. Similarly, suppliers are unable to sell their products a a fair market price, leading to producer surplus.
Deadweight loss from monopolistic pricing come from the loss of MB on the consumer side.
TAX INCIDENCE
Tax Incidence is the analysis of where the burden of tax "falls," either buyers or sellers, based on different economic situations. Usually, the main factors of incidence are the tax rate and the elasticity of the supply (it does not depend on where tax is collected).
Panel A) If there is a new or increased excise tax and supply is elastic, then firms can simply produce more of the good. This will decrease their loss, putting the burden of the tax mostly on the buyers.
Panel B) If there is an increased excise tax and supply is inelastic, then firms make less money with each product. Thus, they bear most of the burden of the excise tax.
Panel C) If there is an increased excise tax and demand is elastic, then consumers will buy less of the product because it will probably cost more. This makes the producers lose money, bearing most of the burden of the excise tax.
Panel D) If there is an increased excise tax and demand is inelastic, then buyers bear most of the burden because they still buy the same amount of products but at a higher price.
Tax Incidence Article
In February of 2009, the federal government passed a law increasing the excise tax on cigarettes, and in March, the increased tax went into effect. The tax was increased by $0.62 per pack up
to $1.01 for every pack. As expected, this led companies to increase the price of cigarettes as well in order to minimize losses. Philip Morris USA, a major cigarette maker, increased the prices by $0.71, which is actually nine cents more than the tax increase. Another maker, R.J. Reynolds Tobacco, increased wholesale prices by $0.44.
In this scenario, the demand for cigarettes is relatively inelastic. It is an addictive drug, so people that smoke will probably continue to buy cigarettes, regardless of the price. For this reason, even as prices increase, the demand stays similar to before. Because of that, the tax incidence, the burden of the increased excise tax on cigarettes, falls mostly on the buyers of cigarettes. If cigarettes were not addictive and demand was elastic, people would buy less. That would put the tax incidence on the sellers. However, as of now, the tax incidence of any increased excise tax on cigarettes will fall on the buyers.
Deadweight Loss Article
This article titled, “Property tax recovery needs to be addressed,” the writer explores the connections between real estate and reality stocks. This article notes that current laws treat these two differently when it comes two tax rates even though people invest in both areas in similar regards. The writer does note that real estate has more value per unit as opposed to stocks. Furthermore, stocks are more volatile and the prices tends to fluctuate more often due to the higher rate of exchange. Thus writer states that if the taxes on properties are lowered, it may serve as a dampener for collection of tax revenue for the government. Furthermore, in terms of sale of stocks, tax was exempted by the government in order to encourage capital market transactions. In order to offset the revenue loss, the government employed tax benefits on equity sale. Unfortunately, this type of system is not available to property transactions which another difference in the two markets. In all, the writer states that these different may cause burden/deadweight loss if the tax rates on two different areas are equalized which prevents government from putting these two taxes under the same law.
DEADWEIGHT LOSS
Deadweight loss (also, excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal. In other words, either people who would have more marginal benefit than marginal cost are not buying the product, or people who have more marginal cost than marginal benefit are buying the product.
Causes of deadweight loss can include monopoly pricing (in the case of artificial scarcity), taxes or subsidies, and binding price ceilings or floors. The term deadweight loss may also be referred to as the "excess burden" of monopoly or taxation.
On a graph, Deadweight Loss is the area between the new market quantity, after one of the causes have occurred, and the previous Pareto optimum.
In the case of a Price Ceiling, the consumer surplus is lost through the inability of the consumer to purchase more products before their MB=MC. Similarly, suppliers are unable to sell their products a a fair market price, leading to producer surplus.
Deadweight loss from monopolistic pricing come from the loss of MB on the consumer side.
Taxes....here is a picture!